Is your business at risk of becoming insolvent?
An insolvent business is one that is unable to pay all its debts when they are due. If you suspect your business is in financial difficulty, you should obtain proper accounting and legal advice as early as possible.
There are different types of insolvency administrations, including:
- Administrator appointed (voluntary administration)
- Mortgagee in possession
The action taken against an insolvent business will differ depending on the nature of the insolvency administration. An insolvency practitioner can conduct a solvency review of your business and outline available options.
There are various penalties and consequences of insolvent trading, including civil penalties, compensation proceedings and criminal charges.
The Corporations Act provides some statutory defences for directors. However, directors may find it difficult to rely upon these if they have not taken steps to keep themselves informed about the company’s financial position.
Contravening the insolvent trading provisions of the Corporations Act can result in civil penalties against directors, including pecuniary penalties of up to $20,000.
Compensation proceedings for amounts lost by creditors can be initiated by ASIC, a liquidator or a creditor against a director personally. A compensation order can be made in addition to civil penalties.
Compensation payments are potentially unlimited and could lead to the personal bankruptcy of directors. The personal bankruptcy of a director disqualifies that director from continuing as a director or managing a company.
If dishonesty is found to be a factor in insolvent trading, a director may also be subject to criminal charges (which can lead to a fine of up to $20,000 or imprisonment for up to 5 years, or both). Being found guilty of the criminal offence of insolvent trading will also lead to a director’s disqualification.
ASIC has successfully prosecuted directors for allowing companies to incur debts when the company is insolvent, and has sought orders making directors personally liable for company debts. ASIC also runs a program to visit directors, where appropriate, to make them aware of their responsibilities to prevent insolvent trading.